Pre Revenue Startup Valuation
Pre-money Valuations Of Real Startups Examples

Pre Money Valuation Examples. Here is an example of pre money valuation: Point 1. A startup company and an investor have agreed that the value of their company is $500,000. The investor agrees to invest $25,000 into the company in exchange for a portion of ownership. The pre money valuation of the company is the value before any investments are.

“Startups, by definition don’t have a long track record of revenue, earnings or cash flow (if any) so much of the valuation exercise is conducted by looking at the marketplace of comparable companies and understanding how the industry for a type of startup values the companies within it,” Georgene Huang, CEO and Cofounder of Fairygodboss.
Pre money valuation is the equity value of a company before it receives the cash from a round of financing it is undertaking. Since adding cash to a company’s balance sheet increases its equity value, the post money valuation will be higher because it has received additional cash. Equity Value vs.
The significant disparity between the mean and median exists because of an increasing amount of 'mega-rounds', particularly among biotech startups. There were about 650 Series A deals in the U.S. Average Series A Startup Valuation in 2021: Series A startups currently have a median pre-money valuation of around $24 million.
Foremost among those is pre-money valuation. So-called because it is the startup valuation before venture capital (VC) investment, everything comes from the pre-money valuation. The higher you can.

“How to evaluate an early stage startup?”;
“How startup valuation works?”;
“How to justify startup valuation for fundraising?”

... and many more similar questions asked by the majority of founders at the beginning of their fundraising journey. The underlying truth is that there is no unified and accepted analytical method of how venture and angel investors can determine a fair value of an early stage startup.

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How startup valuation works

Every student who studies in financial college knows how to calculate the value of the running business, using formulas based on sales traction, past years revenues and other metrics.

With later stage startups it works in a similar way. But at an early stage there is no revenue and other traction numbers allowing to come up with a reasonable estimation of startups’ value. The number of unknowns and uncertainties is very high, which obviously increases the risk factor and makes traditional valuation methods useless at this stage. Business plans and financial forecasts at the early stage startups are not justified by the real traction: they are just “promises” that founders sell to investors to demonstrate their potential. Therefore, investors can only assess the potential and the ability of the founding team to sell those promises.

And yes, it is very subjective and non-definitive, depending a lot on investors’ gut feeling and personal impression of the founders. However, there are still a few methods that are commonly used by many venture capitalists and financial institutions during due diligence, that help to come to some basic market numbers for the startup valuation on the pre-revenue stage.

InnMind’s investment analytical team observed the most common startup valuation models and wrapped them up to showcase various methods.

Most used startup valuation methods

1. Venture Capital Valuation Method

Most common stage: Seed, Series A

As a rule, the startup activity in the first years of operations are most likely unprofitable, therefore this method focuses on the predicted cost of a startup at the moment the investor exits the company. The key role in this method is played by 2 indicators: pre-money valuation (assessment of the company before receiving investments) and post-money valuation (assessment taking into account the investments received and the number of years after which the investor will exit the project).

The venture capital valuation methodology is simple yet descriptive and is based on the following equations:

ROI = terminal value/ post-money valuation;

Post-money valuation = terminal value / anticipated ROI

Terminal value: described as the selling price for the company at some point in the future and can be estimated by projecting a reasonable expectation for revenues in the year of sale and, based on those revenues, estimating earnings.

Anticipated ROI: the majority of VCs usually expect a 10-40x return on investment (as per industry norms for early-stage startups). Considering the following calculations logic, the pre-money valuation can be obtained in the following way (the numbers are taken as an example):

Post-money valuation: €35m (terminal value) / 20x (anticipated ROI) = €1.75m

Pre-money valuation: €1.75m – €300,000= €1.45m

2. Scorecard Valuation Methodology

Most common stage: Pre-Seed

The Scorecard Valuation method is based on the comparison of the target startup with similar or competitive companies on the market focused on multiple risk factors, and adjustment of the average valuation of recently funded companies in the industry. Such comparisons can only be made for startups of the same industry and stage of development to determine the pre-money (before fundraising) valuation.

While executing the assessment, there are multiple factors that should be weighted and given a score to obtain a full valuation. The score to each factor should be allocated in the range of -3 (worst) to +3 (best). The score should be then multiplied against the comparison factor range (see below), to give each section a weighting, then you sum up the total factor and multiply this against the average pre-money valuation for the startup’s industry.

Source: Seedrs

'This is the kind of qualitative method I built back then at Growthbase (but we had a lot more variables and evaluation criteria). The disadvantage of this method is that it has no information about the startup itself (an investor may evaluate the team differently than another investor) or the value of the startup. Furthermore, this method can only be used for the so-called 'copy cats', but not for the disruptive start-ups, which have never been seen before. Many of today's Unicorns, such as SpaceX, Palantir, 10X Genomics, Vir Biotechnology, Databricks, Rivian and others, would have failed at this evaluation,' - commented Kirill Babich, Founder of Malamute Startups Agency, Entrepreneur, Venture Builder & Advisor

3. The Risk Factor Summation Method

Most common stage: Pre-Seed

The Risk Factor Summation Method, introduced by Ohio TechAngels, is the one that touches on a much broader set of risk factors that end up in determining the pre-money valuation of early stage startups. The method could be used as a first step in assessing the potential risks and must be surely combined with other VC valuation methodology. Most of the analytics in the industry outline the following factors upon which the valuation is performed:

Each risk (above) is assessed, as follows:

+2 very positive for growing the company and executing a wonderful exit
+1 positive
0 neutral
-1 negative for growing the company and executing a wonderful exit
-2 very negative

The average pre-money valuation of pre-revenue companies within the same market is then adjusted positively by $250,000 for every +1 (+$500K for a +2) and negatively by $250,000 for every -1 (-$500K for a -2).

4. Dave Berkus Valuation Method

Most common: Pre-Seed

Another way to evaluate early-stage startups is the so-called “Berkus Method”, created by a well-known investor Dave Berkus, who was known as one of the most active angel investors in the USA, having made and actively participated in over 180 technology investments.

“Years ago, confronted with the same conundrum, in the middle 1990’s I came up with a method of assessing the value of critical elements of a startup without having to analyze the projected financials, except to the extent that the investor believes in the potential of a company to reach over $20 million in revenues by the fifth year of business”, - that is how Dave Berkus describes how he came up with this startup valuation method.

Pre-money Valuations Of Real Startups